Rising Wages-inflation Link Just Plain Not True

LETTERS TO CFB

May 22, 2000

I am writing in response to John Koenig's column in the May 17 Business section, "Rising Wages Give Greenspan Nightmares." I would title my response: "Outdated Economic Theories and Corporate Greed Give Orlando Workers Nightmares."

Let's get some facts straight about economics in the 21st century. Because of the U.S. economy's performance over the past five years, most economists have discarded the "Phillips Curve" the notion that low unemployment must fuel inflation.

Mr. Koenig's assertion that rising wages inherently cause inflation is just plain not true. Recent studies, including one by conservative economists at the Federal Reserve Bank of Cleveland, have found that wages respond to, not cause, inflation. In the Cleveland Fed study, Gregory Hess and Mark Schweitzer concluded that "there is little systematic evidence that wages are helpful for predicting inflation. In fact, there is more evidence that inflation helps predict wages."

I am sure Mr. Koenig is aware that the Federal Reserve is more concerned with demand-side inflationary pressures, such as increased consumer spending and an "over-exuberant" stock market. In announcing its latest rate increase, the Fed made no mention of labor markets or supply-side pressures, and mentioned only "increases in demand ... in excess of even the rapid pace of productivity-driven gains in potential supply."

Furthermore, Mr. Koenig seems to believe that, when wage increases are granted, some economic theory requires that these costs automatically be passed on to consumers. In the real world, companies can pass on increased production costs to consumers only if the increase will not price them out of their market. Companies often simply absorb wage increases and maintain price competitiveness by making cuts in other areas, increasing productivity -- or even, heaven forbid, accepting reduced profits.

Look at Walt Disney World. Disney has raised its theme parks' admission price from $33 in 1991 to $46 today -- a 39.4 percent increase. Over that same nine-year period, the starting hourly pay rate for operations workers at Disney increased just 70 cents -- a 12.4 percent increase, or less than 8 cents a year. Does Mr. Koenig really think that there is any relationship between what Disney pays its workers and what Disney charges? If the wage rates at Disney had kept pace with the increases in ticket prices, the start rate would be $7.88 an hour instead of $6.35.

Mr. Koenig suggests that the best option for workers who are dissatisfied with their low pay is to "acquire the skills needed to get higher-paying jobs, and hope that more of such jobs become available in the Orlando area." Putting aside the patronizing aspects of this suggestion, is this really the best option? Wouldn't getting together with your co-workers and developing a collective strategy to make your employer pay more be an even better option? Low-paid service workers, mostly janitors, represented by sister union locals from New York to Los Angeles, have been doing just that and gaining double-digit wage increases and benefit enhancements.

Think about it. Operations workers at Disney logged some 55 million hours of work during 1999. If Disney increased every worker's hourly wage by a dollar an hour, the cost to the company would be something like $60 million after accounting for additional costs such as increased FICA payments. The Walt Disney Co., in what was widely considered a "lean" year, made a profit of $1.3 billion in fiscal year 1999.

Sixty million dollars in the pockets of Disney workers would have a profound effect throughout Central Florida: houses would be built, cars would be bought, goods would be purchased, tuition would be paid. Maybe even some people would have the money and the time to learn skills for those nonexistent, higher-paying jobs that Mr. Koenig favors.

Such an increase would have a minimal effect on the company's bottom line. After all, this is the same company that paid one man, Michael Ovitz, well in excess of $60 million not to work!